Question 1

Which of the following is not included in gross income when received?

Accepted Answer

Refundable security deposits are not included in gross income when received since they are expected to be returned to the individual at a later date. However, if a portion of the security deposit is kept by the payer due to damages or other reasons, that amount may be included in gross income. A, B, and C are all types of income that are typically included in gross income when received.

Question 2

Mike won $700 in a football pool.This amount is not taxable.

Accepted Answer

Winnings from gambling, including football pools, are generally considered taxable income by the IRS and must be reported.

Question 3

Becky wins a car and furniture on a television game show.The fair market value of these items is taxable to Becky.

Accepted Answer

According to IRS guidelines, prizes and awards, including game show winnings, are generally taxable as income at their fair market value. Therefore, the fair market value of the car and furniture Becky won on the television game show are taxable to her as income.

Question 4

Distributions from corporations to the shareholders in a nonliquidating distribution will usually be classified as a dividend up to the amount of the corporation's

Accepted Answer

Nonliquidating distributions from corporations to shareholders are usually treated as dividends up to the amount of the corporation's earnings and profits (E&P). E&P represents the taxable income of a corporation that has not been distributed to the shareholders as dividends or included in the corporation's capital accounts. If the distribution exceeds the E&P, it is considered a return of capital, which decreases the shareholder's stock basis.

Question 5

Hoyt rented office space two years ago to Harris,receiving the first and last months' rent plus a security deposit of $1,000.In early January of this year,Harris moves and Hoyt refunds $250 of the deposit and keeps the remainder to cover $500 which is spent for repairs to the office space and one week of unpaid rent that amounts to $250.How would this information be reflected on Hoyt's tax return this year?

Accepted Answer

Hoyt received $750 from the security deposit that was not refunded, which is considered income. The $500 spent on repairs is deductible as an expense.

Question 6

Jacob,who is single,paid educational expenses of $16,000 in 2019.He redeemed Series EE bonds and received principal of $8,000 and interest of $3,000.Jacob has other adjusted gross income of $85,100.The $3,000 exclusion must be reduced by

Accepted Answer

The $3,000 exclusion is reduced by the amount of other adjusted gross income in excess of $75,000. Jacob's other adjusted gross income is $85,100, which is $10,100 more than $75,000. Therefore, the $3,000 exclusion is reduced by $10,100, which is $1,400.

Question 7

With some exceptions,amounts withdrawn from a pension plan prior to the normal starting date are subject to a ten percent nondeductible penalty.

Accepted Answer

This statement is true. Generally, withdrawals from a pension plan made prior to the normal starting date (usually age 59 1/2) are subject to a 10% penalty tax in addition to income tax. There are some exceptions, such as for those who meet certain disability or financial hardship criteria.

Question 8

Tyler has rented a house from Camarah since last year.The rent is usually $1,200 per month,but Camarah reduced the monthly rent down to $200 for all twelve months this year in exchange for Tyler putting in an inground pool in the backyard.The improvement has a fair market value of $20,000.How much total rental income must Camarah report this year?

Accepted Answer

Camarah must report the fair market value of the improvement ($20,000) plus the actual rent received ($200 x 12 = $2,400), totaling $22,400 as rental income.

Question 9

In December of this year,Jake and Stockard,a married couple,redeemed qualified Series EE U.S.Savings Bonds.The proceeds were used to help pay for their daughter's college tuition.Jake and Stockard received proceeds of $8,000 representing principal of $5,000 and interest of $3,000.The qualified higher educational expenses they paid this year totaled $6,000.Their AGI is below the threshold for phase-out of the exclusion.What is the amount of interest income Jake and Stockard can exclude from their income this year?

Accepted Answer

The exclusion is calculated by multiplying the interest by the ratio of qualified expenses to total proceeds: ($3,000 interest) * ($6,000 expenses / $8,000 proceeds) = $2,250.

Question 10

Which of the following bonds do not generate tax-exempt income for federal income tax purposes?

Accepted Answer

The answer of Which of the following bonds do not...

Question 11

In 2019,Richard,a single taxpayer,has adjusted gross income of $40,200.His AGI includes $4,000 of qualified dividends.Richard does not itemize deductions.What is his 2019 federal income tax?

Accepted Answer

Richard's taxable income is $40,200 - $12,200 (standard deduction for single filers in 2019) = $28,000. The qualified dividends are taxed at 0% up to $39,375 for single filers. Therefore, the entire $4,000 of qualified dividends is taxed at 0%. The remaining $24,000 is taxed at the 10% and 12% brackets. The tax is $970 (10% of $9,700) + $1,716 (12% of $14,300) = $2,686.

Question 12

In December 2019,Max,a cash-basis taxpayer,rents an apartment to Kadeem.Max receives both the first and last months' rent totaling $1,800 plus a security deposit of $400.The amount of income reported by Max as taxable in 2019 is

Accepted Answer

Max must report the first month's rent of $900 as income in 2019 because he received it in 2019. He does not have to report the last month's rent or the security deposit in 2019 because he has not yet earned that income.

Question 13

Social Security benefits are excluded from taxation for all taxpayers.

Accepted Answer

Social Security benefits may be subject to taxation for taxpayers whose income exceeds a certain threshold. The amount of benefits subject to taxation depends on the taxpayer's income and filing status.

Question 14

Income from illegal activities is taxable.

Accepted Answer

According to the Internal Revenue Service (IRS), income from illegal activities, such as selling drugs or engaging in illegal gambling, is taxable and must be reported on tax returns. However, since the income is from illegal activities, there is no legal way to report it, and failure to do so can result in serious penalties and criminal charges.

Question 15

Amy's employer provides her with several fringe benefits.Which of the following are included in her taxable income?

Accepted Answer

A year-end bonus check is considered taxable income. The other options are typically not included in taxable income under certain conditions.

Question 16

Which of the following statements is false?

Accepted Answer

Municipal bond interest is generally exempt from federal income tax and sometimes state and local taxes as well.

Question 17

Carla redeemed EE bonds which qualify for the educational exclusion.The redemption consisted of $14,000 principal and $6,000 interest.The net qualifying educational expenses are $10,000.Her AGI is below the threshold for phase-out of the exclusion.The taxable interest is

Accepted Answer

The taxable interest is calculated by subtracting the net qualifying educational expenses from the total redemption amount and then applying the proportion of interest to the remaining amount. Here, $6,000 interest x ($10,000 expenses / $20,000 total redemption) = $3,000 exclusion, so $6,000 - $3,000 = $3,000 taxable interest.

Question 18

Natasha is a single taxpayer with $100,000 of taxable income.Included in the taxable income is distributions of earnings this year as follows: $$\begin{array} { | l | l | } 
\hline \text { CE Corp., a C corporation } & \$ 1,000 \
\hline \text { SE Corp., an } S \text { corporation } & \$ 2,000 \
\hline \text { Paris Corp., a foreign corporation } & \$ 3,000 \
\hline
\end{array}$$ How much of the $6,000 distribution will be taxed at the 15% tax rate?

Accepted Answer

The $1,000 distribution from CE Corp., a C corporation, is likely a qualified dividend, which is taxed at the 15% rate for most taxpayers. Distributions from S corporations and foreign corporations typically do not qualify for this rate.

Question 19

Unemployment compensation is exempt from federal income tax.

Accepted Answer

Unemployment compensation is not fully exempt from federal income tax. While it is not subject to Social Security and Medicare taxes, it is still taxable as ordinary income on your federal tax return.

Question 20

Jing,who is single,paid educational expenses of $16,000 in 2019.He redeemed Series EE bonds and received principal of $8,000 and interest of $3,000.Jing has other adjusted gross income of $85,100.With respect to the $3,000 of bond interest,Jing must include in taxable income

Accepted Answer

Jing must include the $3,000 of bond interest in her taxable income. However, she may be able to exclude all or part of the interest if she used the bond proceeds to pay for qualified educational expenses. Since she paid $16,000 in educational expenses and only redeemed $8,000 in principal, it is possible that she used some of the interest to pay for those expenses and therefore can exclude some of it from her taxable income.

To calculate how much of the interest is taxable, Jing must first determine the ratio of her educational expenses to the total redemption (principal plus interest) of the bonds:

$16,000 / $11,000 = 1.45

This means that 1.45 times the total interest earned ($3,000) may be excluded from Jing's taxable income.

1.45 x $3,000 = $4,350

Since the maximum amount Jing can exclude is equal to the total interest earned, she can exclude $3,000 (the entire amount) from her taxable income.

Therefore, the answer is C) $1,600 (the remaining taxable income after excluding $3,000).

Quiz 19: Gross Income: Inclusions